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Chasing the TapeInformation Law and Policy in Capital Markets$
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Onnig H. Dombalagian

Print publication date: 2015

Print ISBN-13: 9780262028622

Published to MIT Press Scholarship Online: September 2015

DOI: 10.7551/mitpress/9780262028622.001.0001

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Theory

Theory

Chapter:
(p.20) (p.21) 2 Theory
Source:
Chasing the Tape
Author(s):

Onnig H. Dombalagian

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262028622.003.0002

This chapter considers the theoretical aims of information regulation and the arguments for and against regulatory intervention in the information production chain. It relates the conceptual framework that Fama’s efficient capital markets hypothesis and Gilson and Kraakman’s mechanisms of market efficiency provide policy makers in considering how to regulate information dissemination and informed trading in capital markets. It further describes how behavioral finance and market microstructure theory have challenged that framework. It then considers the common types of market failure that justify regulatory intervention—underinvestment in public goods, dominant market share, agency costs, asymmetry of sophistication and access—while also discussing how public choice theory and regulatory failures may counsel restraint. The chapter ends with a discussion of market failures and regulatory failures in information policy that contributed to the recent financial crisis.

Keywords:   Market efficiency, Informed trading, Behavioral finance, Market failure, Regulatory failure, Public good, Agency costs, Asymmetry, Public choice theory, Financial crisis

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